For-Profit College Stocks Are Out of Detention

The recent scrutiny faced by for-profit higher education providers has mostly done wonders only for the short-sellers of the stocks of these companies.

The For-Profit Colleges motif, for example, has fallen 13.3% in the past 12 months, a period that has seen the S&P 500 gain 13.6%.

For investors, however, there is some evidence to suggest that expectations may have reached a point of falling so low that upside surprises are boosting the confidence of those still committed to the sector’s potential.

As the Wall Street Journal explained, the US Department of Education and other government agencies have been cracking down on for-profit colleges, which typically receive a significant portion of their revenue from the federal student aid. The Obama administration has repeatedly pointed to the sector as a key driver of rising student debt and defaults, accusing schools of recruiting aggressively to boost profits while providing poor educations.1

ITT Educational Services said last month that it received a Wells notice from the SEC in connection with two student-loan programs, according to the Journal. Meanwhile, the US Department of Education in August placed the company under heightened cash monitoring in August after it failed to submit 2013 financials and compliance audits tied to its administration of federal financial aid.

Another for-profit operator, formerly public Corinthian Colleges, reached a deal in July with the Education Department to sell off the bulk of its more than 100 campuses and wind down the rest amid concern about its marketing practices, the Journal said, including claims that the company falsified data about student job placement.

But earlier this month, ITT Educational (which has a 2.3% weighting in the motif) reported that its enrollment figures have declined less than expected in recent months while its cash position has improved.

As of Sept. 30, ITT said it enrolled more than 57,000 students, down 6.3% from a year earlier. New student enrollment declined 8.1% in the June quarter and 9.5% in the September quarter, the company said. However, ITT had warned in May that its second-quarter enrollment could drop 10% to 15%.

On the news, shares of ITT doubled, and they’re up nearly 115% in the past month, reflecting both the modestly positive news and a likely short squeeze – the Journal noted that the company’s short interest position is nearly 60%.

However, other for-profit providers have also been hanging tough by beating Wall Street’s expectations. DeVry Education Group (a 21.2% weighting in the motif) posted quarterly adjusted profit and revenue last week that beat Wall Street’s earnings expectations.2

Shares of DeVry have climbed 7.1% in the past month, combining with ITT’s stock to help lift the For-Profit Colleges motif 5.5% higher. During that same time period, the S&P 500 has fallen 0.7%.

In addition, Apollo Education, the operator of the University of Phoenix, has seen its shares hold up after recently beating analysts’ quarterly profit expectations (although missing on revenue).3

With the high short interest in many of these stocks, the one certainty for now may be the sector’s volatility, but in the case of this beaten-down space, no news may really be good news.

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